The Effects of Student Loans on Long-Term Household Financial - - PowerPoint PPT Presentation

The Effects of Student Loans on Long-Term Household Financial Stability

Dora Gicheva1 Jeffrey Thompson2

1UNC Greensboro 2Federal Reserve Board

October 26, 2013

Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 1 / 26

Introduction

Motivation

Unintended consequences of student loan program that we should be aware of Need to take into account all costs for cost-benefit analysis Less is known about long-term consequences of holding student debt

Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 2 / 26

Introduction

Motivation

Are growing debt burdens in the right tail of the distribution manageable?

◮ Should not ignore positive return to student borrowing

What about borrowers who do not complete degree?

Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 3 / 26

Introduction

Research Questions

How do student borrowers fare financially after graduation, compared to similar non-borrowers? Are borrowers who do not complete Bachelor’s degree more likely to experience financial hardship? How can we address bias from omitted variables and simultaneity/reverse causality?

Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 4 / 26

Introduction

Empirical Approach

Data from Survey of Consumer Finances Student loans that originated between 1970 and 2010 Observe outcomes in 1995-2010 Instrument for amount borrowed using variations in aggregate borrowing trends

◮ Exogenous policy-induced changes in eligibility and take-up Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 5 / 26

Introduction

Overview of Findings

Conditional on broad measures of educational attainment, student debt linked to credit constraints and bankruptcy

◮ $10,000 in student loans increases probability of being turned down by

creditors by about 6 percentage points

Home ownership rates may also be affected Relationship stronger for non-completers

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Introduction

Post-Graduation Outcomes Affected by Student Debt: Existing Evidence

Graduate school attendance (mixed evidence) Career choice and starting salary Specialized studies:

◮ Physician specialty choice (limited impact) ◮ Law school graduates’ choice to enter public sector law

Entry into marriage

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Methodology Specification

Empirical Model

Want to estimate E(Y ) = α(Loans) + Xβ Omitted variable bias:

◮ Student loans correlated with many unobservables that contribute to

financial stability

◮ Type of education, academic success, family background,...

Possible reverse causality

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Methodology Specification

Empirical Model

Two-stage least squares approach First stage: E(Loans) = Xδ + γZ The instrument Z equals average amount borrowed per full-time equivalent student (including non-borrowers) in constant dollars in year when respondent was 17 years old

◮ From Trends in Student Aid 2012 Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 9 / 26

Methodology Specification

Aggregate Borrowing Trends

Reauthorizations of the HEA of 1965

◮ New types of aid ◮ Expand loan limits and eligibility

Interest rate changes Private loan market Increasing gap between costs and grant aid Information availability

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Methodology Specification

Aggregate Borrowing Trends

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 Federal/Private Loans per FTE Student Year Federal Loans per FTE Student Total (Federal+Private) Loans per FTE Student

Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 11 / 26

Methodology Specification

Aggregate Borrowing as Instrument

Captures exogenous changes in eligibility and take-up rates Relationship between prevalent borrowing behavior in year of high school graduation and individual’s borrowing decisions

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Methodology SCF Data

Survey of Consumer Finances Sample

Six cross-sectional surveys conducted between 1995 and 2010

◮ Full student borrowing histories ◮ Very detailed information about assets and liabilities

Respondents born in 1954 or later - entered college after 1970 Age 29 or older N = 12, 037 Weights make sample nationally representative

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Methodology SCF Data

Student Loans in the SCF

All debt accumulated by household members Exact amount and year of each education loan Adjusted for inflation

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Methodology SCF Data

Student Loans in the SCF

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 1995 1998 2001 2004 2007 2010 $0.0 $5.0 $10.0 $15.0 $20.0 $25.0 $30.0 $35.0 $40.0 Share of PEU with any atudent loan debt Average borrowing ($1,000) among those with debt Borrowing is in constant 2010 dollars.

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Methodology SCF Data

Outcomes of Interest

Whether denied credit, granted less credit than applied for initially, or did not apply because feared rejection - previous 5 years At least one late payment of bills (60 days or more) - previous 5 years Payment to income ratio over 40%

◮ All loans ◮ Excluding education loans ◮ Excluding education loans and mortgage

Whether filed for bankruptcy - previous 10 years Whether owns primary residence

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Methodology SCF Data

Summary Statistics, Outcome Variables (N = 12,037)

36.76% 8.56% 11.40% 10.77% 2.15% 8.29% 60.78%

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Methodology SCF Data

Summary Statistics, Explanatory Variables (N = 12,037)

College degree 0.198 Masters degree 0.061 Doctorate 0.012 Female respondent 0.559 White 0.683 Black 0.141 Hispanic 0.111 Age 39.5 (7.2) Any college-age kids in PEU (18-24) 0.109 Disabled (either R or SP) 0.065 Normal income ($1,000) 86.7 (211.8) Predicted wage ($1,000) 51.6 (65.2)

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Methodology SCF Data

Aggregate and Derived Controls

Annual average county-level unemployment rate from the BEA County per-capita personal income, relative to national average Predicted wage income

◮ Using occupation, demographics, full-time or part-time and

self-employment status, years of education

◮ Current Population Survey data Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 19 / 26

Results Main Sample

Results (Second Stage)

Denied Credit 0.0063 *** Bankrupt 0.0068 *** Late Payments 0.0036 ** Home Owner

• 0.0018

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Results Main Sample

Results (Second Stage)

Denied Credit 0.0063 0.0068 *** *** Bankrupt 0.0068 0.0071 *** *** Late Payments 0.0036 0.0037 ** ** Home Owner

• 0.0018
• 0.0023

Education X

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Results Main Sample

Results (Second Stage)

Denied Credit 0.0063 0.0068 0.0082 *** *** *** Bankrupt 0.0068 0.0071 0.0074 *** *** *** Late Payments 0.0036 0.0037 0.0041 ** ** *** Home Owner

• 0.0018
• 0.0023
• 0.0055

** Education X X Disabled X College-age kids X Normal income X

Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 20 / 26

Results Main Sample

Results (Second Stage)

Denied Credit 0.0063 0.0068 0.0082 0.0073 *** *** *** ** Bankrupt 0.0068 0.0071 0.0074 0.0079 *** *** *** *** Late Payments 0.0036 0.0037 0.0041 0.0027 ** ** *** Home Owner

• 0.0018
• 0.0023
• 0.0055
• 0.0035

** Education X X X Disabled X X College-age kids X X Normal income X X County UR X County income X

Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 20 / 26

Results Main Sample

Results (Second Stage)

Denied Credit 0.0063 0.0068 0.0082 0.0073 0.0060 *** *** *** ** ** Bankrupt 0.0068 0.0071 0.0074 0.0079 0.0072 *** *** *** *** ** Late Payments 0.0036 0.0037 0.0041 0.0027 0.0023 ** ** *** Home Owner

• 0.0018
• 0.0023
• 0.0055
• 0.0035
• 0.0021

** Education X X X X Disabled X X X College-age kids X X X Normal income X X County UR X X County income X X Predicted wage X

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Results Main Sample

Results (First Stage)

F statistic of excluded instrument 57.47 Average loans per FTE 0.00317***

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Results Main Sample

Results (First Stage)

F statistic of excluded instrument 57.47 Average loans per FTE 0.00317*** Female 0.381 College degree 3.601*** Masters degree 9.074*** Doctorate 16.15*** White 3.239** Black 4.280** Hispanic

• 0.121

Age

• 0.680**

Age sq 0.00679* Any college-age kids 2.356*** Disabled

• 0.357

County relative per-capita income 1.560* County unemployment rate 0.350*** Predicted earnings 0.912***

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Results Non-completers

Student Debt and College Completion

Educational Attainment by 2009 of Students First Enrolling in 2003-04, by Total Amount Borrowed (and Overall Percentage of Students in Debt Category)

• Cumulative Debt Level

Percentage

0% 20% 40% 60% 80% 100% Did Not Borrow (43%) $1 to $10,000 (25%) $10,001 to $20,000 (16%) $20,001 to $30,000 (8%) $30,001 to $50,000 (5%) $50,001 to $75,000 (1%) $75,001 or more (1%) Total No Degree, Left Without Return No Degree, Still Enrolled Attained Certificate Attained Associate Degree Attained Bachelor’s Degree 26% 15% 42% 53% 58% 65% 85% 31% 1% 9% 9% 10% 10% 11% 9% 9% 9% 17% 7% 3% 2% 1% 0% 9% 14% 16% 17% 16% 15% 15% 10% 15% 5% 43% 43% 24% 18% 14% 10% 36%

Source: Trends in Student Aid, 2012

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Results Non-completers

Results by College Completion Status

• 0.14
• 0.12
• 0.10
• 0.08
• 0.06
• 0.04
• 0.02

0.00 0.02 0.04 0.06 Denied Credit Bankrupt Late Payments Home Owner R or SP attend, drop out R & SP attend, R and/or SP drop out R or SP attend, complete R & SP attend, complete

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Discussion

Summary of Findings

Student debt likely associated with decreased financial stability

◮ Additional $10,000 in student loans predicts 6 percentage point

increase in probability of being denied credit over 5 year period and 7 percentage point increase in probability of bankruptcy over 10 year period

◮ Borrowers more likely to be late on bill payments ◮ Home ownership rates may also be affected

Debt management seems particularly hard for non-completers Many confounding factors make establishing causality hard

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Discussion

Why Does Student Debt Lead to Observed Financial Distress?

Impact on disposable income, combined with liquidity constraints Debt-to-income ratio and mortgage availability Changing aggregate labor market conditions?

◮ If continued decline in the returns to postsecondary education

combined with policy-induced increase in borrowing

◮ Unlikely - evidence of increasing high school-college wage differential Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 25 / 26

Discussion

Why Does Student Debt Lead to Observed Financial Distress?

High uncertainty in ex post return to a degree

◮ Cannot tell if borrowers are making optimal choices ex ante ◮ Particularly bad for non-completers ◮ Focus on expected return or better safety net?

What is the correct counterfactual?

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